Fonterra says its Beingmate associate may lose over NZ$200 million for 2017; directors questioning Beingmate's financial management and reporting; Fonterra will 'consider financial implications' in its own forthcoming interim result

Fonterra says its Beingmate associate may lose over NZ$200 million for 2017; directors questioning Beingmate's financial management and reporting; Fonterra will 'consider financial implications' in its own forthcoming interim result

Fonterra's investment in Chinese company Beingmate Baby & Child Food Co - long questioned by some market analysts and investors - has become another full-blown China horror story for the New Zealand dairy giant.

On paper, Fonterra has now lost about NZ$500 million of the NZ$750 million it committed to Beingmate in 2014, with the Beingmate shares down 10% on Monday to about RMB 6, compared with the RMB 18 that Fonterra paid.

Fonterra said on Monday that Beingmate had issued a forecast earnings downgrade for its financial year ended 31 December 2017, revising the previously announced forecast loss of RMB 350 million – RMB 500 million to a forecast loss of RMB 800 million – RMB 1 billion (NZ$171 – NZ$214 million).

In other words the losses will be double what Fonterra had earlier been told and had indicated.

But worse than that, Fonterra's also saying, in a statement that didn't quote any of the senior Fonterra executives, that questions are being asked now about Beingmate's financial management and reporting practices.

"As an investor in Beingmate (18.8% shareholding), we are extremely disappointed by this announcement and the on-going performance of the company," the Fonterra statement said.

"We are seeking more information on the forecast downgrade in addition to receiving Beingmate’s full year financial statements. We will consider the financial implications on our investment for the purposes of our upcoming interim financial results."

In regard to the financial management and reporting practices issues, the Fonterra statement said that four Beingmate directors, including the two directors designated by Fonterra, "have expressed reservations relating to some aspects of Beingmate’s financial management and reporting practices".

"We have total confidence in the judgement of our designated directors (Johan Priem and Christina Zhu) and that their actions are in the best interests of Beingmate and all of its shareholders. We are concerned about the reservations they have expressed and are seeking clarification on the matters of concern."

First NZ Capital analyst (Head of Institutional Research) Arie Dekker said outside of the "ongoing" disappointing financial performance of Beingmate, "in our view an area of potentially greater concern is Fonterra’s announcement that its two directors, along with two other directors (one representing a ~5% stake; the other an independent), have expressed reservations relating to some aspects of Beingmate’s financial management and reporting practices".

He said the other two directors do not represent interests associated with the majority owner who has the largest stake in Beingmate.

'Poor financial performance'

"It now appears that Fonterra’s investment in Beingmate is subject to poor financial performance, potential management/accounting issues and the possibility of some dissention at Board level, although Fonterra have not explicitly confirmed the latter."

Dekker noted that Fonterra would "consider the financial implications on its investment for the purposes of the upcoming interim financial results - having taken the decision to write down the investment by a relatively modest amount when it released its FY17 results (compared to the then market pricing - largely on the basis of the strategic value its auditors saw in a minority 18.8% stake)."

He said that at Monday's market prices the Beingmate stake was at a level that is a third of what Fonterra paid when it made the investment, "and less than half of the value on which Beingmate is currently recorded in Fonterra’s balance sheet".

In its announcement, Fonterra said it was "disappointed" that Beingmate is not maximising the opportunity created by the early registration of its 51 formulations under the new registration rules.

"The Chinese market is growing rapidly and within five years, forecast demand for infant and baby dairy products will be more than the total for other global markets, so the potential remains.

"China is one of Fonterra’s largest global markets, accounting for NZ$3.4 billion of our sales revenue and a normalised earnings contribution of greater than NZ$200 million in FY17. Our business in China has been enabled by our integrated strategy, comprising of Ingredients, Consumer and Foodservice, our China farms and our Beingmate partnership."

References to the performance of Beingmate in Fonterra's published results and commentaries have often been cursory.

In a research report ahead of the release of Fonterra's annual results last September (and well before obviously this latest news), Dekker said sales and earnings at Beingmate were significantly down on when Fonterra (which he referred to throughout his report as FSF) invested and had not delivered to date, on the potential Fonterra outlined when it made the investment.

"In short, Beingmate has lost sales, missed FSF targets and likely lost reasonable market share in the last three years and FSF has been largely silent on it with investors," Dekker's report said in September.

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30 Comments

What is it about NZ companies. They almost always fail to manage their overseas investments (Air NZ & Ansett springs to mind amongst numerous others). Either the original investment decision has not gone through sufficient due diligence and/or the ongoing oversight of the investment is poor.

Not just NZ
Read the Guardian about Carillion that lost their shirts in overseas investments and a bomb on building simple things like hospitals.
Its a byproduct of the capitalist system as practiced rewarding executives for inflated shareprices.
Nice thing about Goverment contracts, read PPP,is they bail the executives and shareholders out when it becomes a ridiculous mess, cosider East Coast Rail in UK.
Of course, that has nothing to do with Fonterra.

So who at Fonterra is going to pay for what appears a monumental screwup. Fonterra PR machine has fudged their Beingmate investment's performance since the original purchase. As pointed out by a number of reputable commentators and analysts over the past couple of years.

The law is opaque often left to the interpretation of judges who are simply told what to do in commercial cases .

The Chinese Government is a large part of the problem in foreigners doing business with China , ignoring the shady practices as best and encouraging them , at worst .

The total almost disrespect for Western intellectual property , trade marks , copyrights and everything else sacred to our Western understanding of business ethics , is a major problem in Asia generally , and China in particular

And India is not much better .

We New Zealanders are far too trusting for our own good .

We should not take minority stakes in businesses in China and then proceed to impart our technical know-how to people who will shaft us .

This massive loss will have to be provided for , resulting in the destruction of unit-holder value , and less tax revenue for NZ .

It would be nice to see the business case that was put up to the Board to make this investment .

Of course we never will see it , but it would make a really good MBA Case study on Corporate cock-ups

The Chinese Government is a large part of the problem in foreigners doing business with China , ignoring the shady practices as best and encouraging them , at worst .

The total almost disrespect for Western intellectual property , trade marks , copyrights and everything else sacred to our Western understanding of business ethics , is a major problem in Asia generally , and China in particular

Hmmm... some US citizens feel obliged to air similar misgivings in respect of their own market place.

All of the important activities in this land have been converted into odious rackets, by which I mean nakedly dishonest money-grubbing scams, especially the two sectors that used to be characterized by first, doing no harm (medicine), and seeking the truth (education). But everything else we do is infected by engineered falsehood and mendacity, including the news media, the law, banking, government, retail commerce, you name it. We’re living in a culture of pervasive control fraud, in which authorities set up looting and asset-stripping operations without any restraint. Read more

Will be interesting to see how the Board handles this. The half yearly accounts meetings are not far away so the Directors had better get thinking how they are going to take the heat from shareholders over this.

Time for John Wilson to go and for the independent directors to start to do their jobs - be independent of the Chair, as IMO they aren't.

Fonterra has expanded its presence in China, as the company has partnered with Alibaba’s Hema supermarket chain to release a new range of fresh milk, which will be available from all of Hema’s 14 stores in Shanghai and Suzhou.

Branding is only good for a while, ask a Telco.
In my families annual revaluation of suppliers of broadband we slashed forward price by nearly 40%.
Simililarly milk, Fonterra may charge $8 per litre through Alibaba but there is no reason for the long term price to be more than $2.
They wont sell much...

So Fonterra will manage this tiny deal much of which seems to be at substantial risk to its brand as its using chinese inputs in the hope that chinese shoppers are willing to pay a premium for its name, hmmmm.

Looks like a bit of smoke, mirrors and hype, with tad of desperation thrown in?

A good analysis, i couldnt have done it.
They are gambling on the mystique of technology, that there are enough highly paid in china that will buy the convenience.
But anyone can produce fresh milk and will want a slice of the perceived differential.

So have they really lost that much money or are they just fudging the accounts to steal off Fonterra. It sounds like thats what they suspect or am I mistaken. Or is this info presented as such so that we conclude the chinese are thieves. Wilson and the dutch guy have to go surely. Having dealt with the former many years ago this shemozzle doesnt surprise me in the least. The warnings were there when they bought into this outfit. But they gambled nearly a billion dollars of farmers money anyway. I feel so sorry for the men and women out there in cowsheds all over our land, every morning early, every arvo...while what was it....velocity volume and value??? was some silly mantra those two stars dreamed up. 8 million dollar man. Tui billboard there somewhere.